UK Edition
Regular readers will know that this column is constantly seeking protection from the storm of rising rates, galloping inflation and weak economic growth by finding companies that offer strong balance sheets, asset backing and equity valuations that look attractive.
Such companies will, hopefully, offer the ideal mix of protection on the downside and potential for capital gain and income on the upside, when the squalls recede. One such company is pubs-to-hotels group Fuller, Smith & Turner.
Even if the shares are yet to bring us any great joy, as we are sitting on a small paper loss, last week’s full-year results to the end of March offer more than enough encouragement.
Sales and profits met expectations, despite a hefty hit from rail and Tube strikes and higher utility bills, while net debt was unchanged, including leases, despite increased capital investment, a £5m buyback scheme and higher dividend payments.
Indeed, management’s decision to jack up the full-year dividend by 30pc for fiscal 2023 suggests there is no lack of confidence in the boardroom of the Chiswick-headquartered concern. A 13.9pc year-on-year rise in like-for-like sales in the first 10 weeks of the new fiscal year to March 2024 is one explanation for that, even if the rail strikes remain unresolved.
Fuller, Smith & Turner is particularly badly hit by a reduction in commuter traffic, as a significant element of its estate is situated in central London.
Headwinds may therefore persist, but it looks well placed to weather them. Even including £81m of leases, Fuller, Smith & Turner has less than £200m of net debt on its balance sheet and interest cover is still two times, despite the impact upon operating profit of inflation and the strikes.
Better still, the balance sheet offers tremendous asset backing. The £340m market cap stands well below the £583m valuation given to its fixed assets (including property) and total net assets of £443m (or £414m once £29m of intangible assets are excluded).
The board is now suggesting a more appropriate valuation for its properties is £996m, a figure that implies a net asset value per share figure of £14.07. Such an assessment is supported by how the company sold one pub in Southwark, south London, for £20m, compared with a £3m valuation on its balance sheet. In simple terms, Fuller, Smith & Turner’s shares trade well below their replacement value – you simply could not create the company as it stands today for £340m.
While management is not going to be short-sighted, or foolish, enough to run an asset-stripping exercise, such figures should help to underpin the share price, while any ongoing improvement in trading, strikes or no strikes, could help point out the upside potential. In the meantime, investors can pocket a near-3pc yield.
We will continue to prop up the bar at Fuller, Smith & Turner.
Questor says: buy
Ticker: FSTA
Share price at close: 598p
Update: Burford Capital
Now that the litigation specialist has a US listing for its stock, it is obliged to report on a quarterly basis and the company’s maiden Q1 results will cheer holders of the 6.125pc coupon bond that matures next year.
The 6K US regulatory filing reveals that income grew way faster than expenses, so that net income more than quadrupled and tangible book value per share rose 14pc. Better still, Burford Capital continues to invest in its future pipeline of cases, as cash deployments rose 29pc year-on-year. Even if some of those will only bear fruit in years to come, they do potentially lay the foundations for future profits.
Meanwhile, bondholders can continue to mull what Burford Capital’s share of the payout will be in relation to the American ruling in favour Petersen and Eton Park against the state of Argentina for its forced nationalisation of oil firm YPF in 2012. Analysts still think Burford could be due a payout of between $3bn (£2.4bn) and $6bn, even allowing for the parlous state of Argentina’s finances.
The bond pays coupons semi-annually, in April and October . We have 12 such payments of £3.0625 per £100 bond in the bag since our initial study.
Three more are due before the bond matures and the principal is repaid on Oct 26 2024 and income-seekers will be glad to receive them, even if the yield to maturity no longer fully covers the prevailing rate of inflation, at least for now.
Questor says: hold
Russ Mould is investment director at AJ Bell, the stockbroker
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